Investing Beyond the Magnificent Seven

What if the next big investment opportunity isn't where you'd expect it to be? Join us as we kick off our 2025 podcast series with Glenn, where we explore the world of 'spice' stocks—those hidden gems in burgeoning sectors like data centers, cloud services, renewable energy, and quantum computing. These mid-cap and smaller companies offer a unique way to spice up your portfolio with high alpha potential, balancing risk and reward through a barbell strategy. Discover the importance of selecting companies with strong profitability and cash reserves, ensuring your investments remain stable even amidst the allure of high-growth opportunities.

Meet the intriguing players like Palantir and IonQ in the high-risk investment space. We critically assess Palantir's impressive market cap against its revenue, delving into its heavy reliance on government contracts, while also exploring IonQ's futuristic quantum computing technology with its potential to revolutionize encryption and cryptocurrency security. The conversation emphasizes the need for a cautious approach, balancing the excitement of high-risk opportunities with the importance of measured investment strategies.

Explore the strategic potential of mid-cap stocks as we challenge the dominance of mega-cap giants. With Glenn's insights, we scrutinize the potential pitfalls of over-reliance on stocks like Apple, Google, and Tesla, considering regulatory pressures and operational challenges. Uncover the sweet spot for investors seeking long-term growth by allocating 10-15% to mid-caps, especially in emerging sectors like AI and healthcare. This episode provides a comprehensive guide to building a robust and balanced portfolio, positioning mid-caps as a stable and attractive alternative in a market often overshadowed by its larger counterparts.

Straight Talk for All - Nonsense for None


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Chapters

• 0:27 Investing Beyond the MAG-7
• 14:56 High-Risk Investment Opportunities
• 27:03 Understanding Risk and Building Portfolios
• 42:03 Exploring Mid-Cap Opportunities for Portfolios

Transcript

Steve Davenport: 0:27

Welcome everyone to our first podcast of 2025. It seems unreal, after going through the conversion to the 21st century, that we're already a quarter through this century, but time flies when you're having fun. Time flies when you're having fun, and we hope to have some fun with the podcast this year and continue to satisfy everyone's interest in markets and being a little skeptical about them, and I guess I would say that our skepticism barometer is pretty high right now. It's going to be an interesting year and we want to start today with a discussion about going beyond the MAG-7. We've heard about the MAG-7 for the last year and a half and all about artificial intelligence and what the future is going to hold. A lot of futuristic earnings have been built into these names. Today, I'm going to ask Glenn what do you think? Are there investments beyond the MAG-7, Glenn?

Clem Miller: 1:39

Okay. So let me just I'm going to back up a bit and say that I think that you know, as we enter 2025, there really is a good chance that we might see a drawdown in markets, and so one of the things that we need to look at are there stocks that have a high alpha potential that may not, as the year progresses, have a beta that sort of overwhelms that alpha? And so I've got a number of stocks here on my list which are I would call them, perhaps spice to the portfolio and they could add some real alpha opportunities. Now, I don't expect necessarily all of them to do well. Some of them are priced quite high, valued quite high, quite high, valued quite high but you know, if even some of them do well, they could add some oomph to portfolio returns.

Clem Miller: 3:01

We're going to talk in a separate podcast about how to protect your portfolio downside In a sense, I've been taking my portfolio and doing what you would call barbelling it, and barbelling would be where you're sort of mixing up, having one category of stocks and then a second category of stocks, and the first category of stocks are really my beta protection, and then the second category of stocks are more of the spice. So in this podcast we're going to talk about the spice. And let me go through a few names Steve Can you define spice a little bit Well, spice.

Steve Davenport: 3:43

I don't know 20% or something, or how spicy do you get?

Clem Miller: 3:51

Well, these are relatively smaller stocks. Some are small cap, some are mid cap. That's not why I'm holding them because they're smaller, mid but because of the stocks themselves. They tend to be in areas such as data centers, cloud services, high-speed connectivity, renewable energy services and possibly our newest flavor of the month quantum computing. You are getting spicy, sir, Right. And there's stocks that are expected to grow quite quickly, have been growing quite quickly in terms of market cap, as well as in terms of fundamentals, like revenues. Some of them well, most of them are already profitable, and those that aren't profitable have runway, because if you look into their financial statements a little more deeply, you see that they actually have a lot of cash that they can deploy. So that's one of the things I've been looking at. I don't want to invest in unprofitable stocks that don't have any cash. I want to see that they have a lot of cash. So, steve, should I go through a few of these?

Steve Davenport: 5:19

Yeah, let me just try to put it in perspective for the average.

Steve Davenport: 5:22

I mean, we're not recommending stocks for people. We're trying to help educate people about different stock and how those different stocks can be combined in your portfolio to create what we think is a better balance for the appropriate time and market conditions. I like the idea of talking about groups of stocks, of talking about groups of stocks, and I think what you're trying to do is look for names that may not be as overpriced as some of the larger names in this space and may have a similar runway in terms of future growth opportunities, and I like the idea of finding some spice. But I also I love the fact that you require you know they'd be profitable and they have some cash, because I think that when I look at certain names and think this name is really based a lot on hope and not a lot on, you know, actual ability, then I get worried. So I like the fact that you're, you know, putting the additional requirements that it's not just growth for the sake of growth, but it's growth that has some foundation and some track record of performing.

Clem Miller: 6:39

So, yeah, I mean some foundation, but you know, on this part of the barbell I'm sort of loosening up my my up the requirements I put on the rest of the portfolio. I'm willing to go higher on peg ratios and I'm willing to go higher on beta and short interest. The main thing is on the peg I'm willing to go higher because these are stocks that in some cases, have expected three-digit growth rates, and so to look at the next three to five years may not really be in terms of forward peg, may not be really all that sufficient to capture the true value of some of these companies. Now, I'll grant you that there's risk involved in taking that approach, but it's not like my entire portfolio consists of these stocks.

Steve Davenport: 7:42

Right, that's what I want to try to get some perspective for our listeners. Yeah, I would say 50% of your portfolio in these days.

Clem Miller: 7:51

No, no, no, I'm talking about 20% of my portfolio. Would be at max. Would be in these stocks.

Steve Davenport: 7:59

But that's enough to-. That's why I call it spice, right, I mean it's not you still have some protein and some starches, but you've sprinkled in some other things to make it a little flavorful.

Clem Miller: 8:13

Correct. So let's look at a few of these things. So, first of all, there is a company called Vertiv. You ever heard of it? Vertiv? Vertiv, vrt no, vrt $42 billion market cap Makes electrical components for a range of industries. So it's not entirely dependent on advanced technologies and although it sells into data centers and whatnot, it's got $7.5 billion in revenue and it's got nice profitability. So, yeah, that's a. I think that's a good one and I'm actually already invested in that Right. So so that's good. Ok, we've got another company here called Vistra. You ever heard of that one? No, vistra is. You can think of it as an up-and-coming competitor to New Era Energy. So it's a power producer, retail power producer, sells into a lot of different industries. Of course, with all the demand for power that's coming out of the data centers and artificial intelligence and whatnot, there's a lot of the demand comes from there. But Vistra is leveraging renewable energy technologies and it's got a $47 billion market cap, $17 billion of revenue, and also is profitable. So that's Vistra, is Vistra?

Steve Davenport: 10:06

considered an industrial. Where would I put it? It would be a utility.

Clem Miller: 10:12

It would be a utility. It is a utility, right, it would be considered a utility. Okay, vertiv would be the one I talked about earlier, would be considered an industrial. But you know again, it's. You know it sells into a lot of, uh, the more technology intensive industries.

Clem Miller: 10:34

Um, you've got, uh, you've got a um, let's see here, uh, I would say a $20 billion, oh, wait a minute, sorry, yeah, $8 billion company, a market cap called Kindrel. Have you heard of that? No, k-y-n-d-r-y-l. So no, i's all Y's. Kindrel. Cloud services, ai, cloud services for data centers, AI, kind of a tiny little niche competitor to, you know, aws and Azure and so on, and so maybe it's an acquisition candidate for the future, kindrel, and it's got, like I said, $8 billion market cap, it's got $15 billion of revenues and it's profitable. So there's that one, uh, there's that one um, 11 billion dollars, uh, market cap. Cls, canadian company actually. Uh, but you know, sells around the world, especially in the united states. Um, supply chain solutions. Now, when I think of when you, you know here here, you know, when you think of supply chains, you think of goods, but you know this isn't a company that that trucks things around. This is a company that provides information system solutions to help out companies with their supply chains. So, $19 billion revenues, profitable CLS. So that's one right there. So then we've got let's see, looking at my list again, um, I think you know those would be, uh, the companies that are, you know, I think, easily, more easily, added to the portfolio. Now let me talk about the really spicy ones. Okay, all right, that I would be. I really have to hold my nose to add these if I wanted to.

Clem Miller: 13:14

So one that's always in the news, that everybody gets excited about so much so that it's driven up its peg ratios to astronomical limits, is Palantir. Yeah, you may have seen news articles about that, I think everybody probably has. So it's a, it's a software platform, uh, for the intelligence community. Uh, and you know everybody well, not everybody, I don't want to characterize this as everybody, but a lot of folks think that you know, if you've got something that the intelligence community uses, can use that there's a certain kind of stability to the growth trajectory for that. So it's almost like you know, it's almost like taking. So it's customers, the government, like you know, it's almost like taking its customers, the government customers, the government, it's, uh, intelligence community, I think the defense community too, uh. So it's got that kind of stability, uh, that the defense and intelligence community offers in terms of a customer base, uh, but it combines that with advanced technologies, and so Palantir when I say software, you mean like it looks like AI to do it.

Clem Miller: 14:41

Right, it's AI, it's machine learning, ai uh, the intelligence community and the defense department can really uh utilize ai uh in some of their um, their data management. So there's been a lot of excitement about this company, uh, but that being and but that being said, it's still small only $3 billion of revenue. It's already profitable, though, and it's got quite a bit of cash almost $5 billion of cash. What's the market cap? Here's where the overvaluation comes in. Its market cap right now is $170 billion. Wow, on revenue of $3 billion, so this has really been bid up. It's PEG, I believe, is in three PEG, not P-E. Peg is either close to or over three digits, so that's why I decided to have to hold my nose to add this one. Yeah, I have trouble with this one.

Steve Davenport: 15:55

I don't know where you you seem to have. You went off the path and now you seem way off the path. Well, isn't this a name that we're like? I like to see names that have potential to expand their clientele.

Clem Miller: 16:10

Well, this would have to grow quite a bit in order to grow into its evaluation.

Clem Miller: 16:16

Right my question is where does the next client come from? Clem? I just keep it on this list because you know it might be something that you know that our listeners might want to look at. Certainly not, like you said, we're not recommending any of these and I think this would be one that you know I wouldn't want to recommend even if we were recommending. But you know it's something that I have on my list here to keep to keep watching.

Steve Davenport: 16:50

Right, it's worth watching, but I guess my question would be where do they grow Like? Does the government just use them more and more? Is that what we're hoping?

Clem Miller: 17:00

You know the the expectations of analysts are that. You know you've got seemingly near endless demand for AI within government space. So, yeah, I can see the skepticism on your face, but you know that's what you read. I mean, you know I've been, you know I look at this thing and I guess part of me is skeptical and wondering well, gee, I wonder if some of these news articles about Palantir are being planted by Palantir itself.

Steve Davenport: 17:34

Well I just wonder Clem, can they go to the government of Brazil and the government of Japan and the government of Russia and say here's our product, are you interested?

Clem Miller: 17:50

Well, certainly not Russia, and one of the things that I'm not sure why Clem. Well, you know why? Because we have export controls, and export controls don't apply just to things like machine guns, right or missiles. They also apply to AI solutions. So there are a lot of places that won't be able to buy this kind of so we'll only sell it to our allies.

Clem Miller: 18:22

Yeah, this would be the kind of thing that could only be sold to what are called NATOo, to the nato countries. Plus, you know what would be considered, uh, major non-nato countries like japan or korea, for example.

Steve Davenport: 18:38

So I can see those I'm trying to understand the growth long term for this like does it keep growing as a piece of the us government or does it keep growing as a piece of a lot of different governments and therefore it has?

Clem Miller: 18:52

I don't know You're asking me questions about Multiple telling you it must have.

Steve Davenport: 18:56

I love the idea, I like the kind of technology advantage. But I guess people would. I mean, is there a rationalization of this number based on the fact that it could be exported more broadly to Canada every one of our allies and it suddenly becomes the standard.

Clem Miller: 19:18

You're asking some key questions and I don't have answers to a lot of these and that's why I don't have it in the portfolio yet. No, a lot of these, and the reason I, and that's why I don't have it in the portfolio yet, uh, but you know, it's something that's on my list because a lot of people have put green flags on this and are investing in it and it's had, you know, immense revenue growth, uh, over the last few years, and so they're obviously doing something right, and there's a lot of positive expectations about it. So it's really spicy, very spicy, right, more spicy than some of the other ones that I talked about about. But let me, let me talk about one more. Well, I've got a few more here, right? I don't want to make this conversation too boring, right, but there's, there's, there's one that is, I think, possibly even spicier than palantir, okay, and that is ion q. Okay, and ion q is a quantum computing company.

Clem Miller: 20:53

Now, you might think what the heck is quantum computing? And quantum computing is a. As I understand it right and I'm not a computer engineer, um, so you know, don't hold me to the Charlie Munger you must understand this completely before you can invest in it. Quantum computing is a highly sophisticated process that departs from the normal bits and bytes that have underscored normal computing to date and actually allows for looking for portions of bits and bytes to be used. So, as you recall from basic computing, right, recall from basic computing, right, uh, you know our, our entire computing structure is based on ones and zeros, and here you can actually have fractions of ones. Well, and what this allows is it allows a lot more computing power and, uh, and it uses technologies like you know, spin, and I mean it uses, it uses, you know, elementary particles. It uses, spin it. Uh, quantum computing is is something that uh purportedly can, uh, can break down, uh, a lot of. Uh, it can be used to um, uh, break cryptograms, you know, break, uh, uh, uh, encryption.

Clem Miller: 22:35

Uh, it's been considered a threat, uh, to the Bitcoin algorithm, right, for example. Uh, it's, uh, it's one of the considerations that is impacting US thoughts about export controls. So there's a lot of concern about China, for example, getting its hands on quantum computing, but it's very, very new in terms of a technology and its revenues right now are only about and IonQ, by the way, is the leader in the field. There are some other companies that are just random startups. They might grow, but they're not something I would want to be involved in. But Ion Cube $9 billion of market cap it's got it's only got okay scary only $38 million of revenue right now, largely from various contracts that have been assigned it by government. But it's got $365 million of cash. So it's got some runway for expansion. But there's a lot of potential growth there. But, as I said, quantum computing is new IonQ, if anything is more spicy than Palantir is. So I'll just name.

Clem Miller: 24:20

I don't want to spend a lot of time on this discussion, but I'll just name a few more stocks, without necessarily going into them that much. You've got $20 billion market cap, ubiquity, ui, internet, telecom Networking Services, telecom networking services. You've got $11 billion market cap, credo, c-r-e-d-o, high-speed connectivity and optical and Ethernet capabilities. So that's an interesting one. And then you have AGX, argon, which is involved in $11 billion market cap, which is involved in engineering services for power, electrical and telecommunications $580 billion of revenue so far, no, $58 billion of revenue so far.

Clem Miller: 25:40

So I think that completes my list. So you can see here that I've got some super spicy ones on the list to be looking at, but I have some ones that you know are are spicy. You know, they're not the mag seven, they go beyond the mag seven, as we discussed for this phone call. Uh, but uh, but they're're one. Some of them I have in the portfolio already, others, uh, you know, I'm just you're sort of monitoring, um, you know, who knows, there might be an entry point for palantir in the future, right, uh?

Steve Davenport: 26:13

yeah, I think it's good to follow names and I think it's good to have these like alternatives. I mean, I, clem, I've been trying to deal with this whole issue of alternatives and do you need alternatives? Are alternatives additive in terms of their correlation? Because they're not traded as much and therefore companies are able to focus on their knitting and not worry about a blow up in the market on a particular day, because the companies are private and they, you know, can live through a lot of things because of their being private. And I keep going back to well, if it's not priced regularly, it's really not indicative of how volatile it is.

Steve Davenport: 26:57

And I look at these names and say maybe these are the alternatives of the future. We previously looked at them as by asset class and said if you're below 10 billion, you're small cap and if you're above 10 billion but less than 40 billion, you're mid cap. And that's the traditional kind of way that people look at them. I like when I think about mid cap and small cap, the S&P. The way they construct their indexes is by committee, so they add names that they think reflect the size of the other names in the index and also components of the business that make up that space, components of the business that make up that space. So I believe that mid-cap is an asset class that has a lot of potential because I think that mid-caps if you're looking at a large cap company and he says I don't have any of this particular type of business there is a takeover premium for mid-cap that allows it to have results that are the same or better than large-cap, given its volatility level.

Steve Davenport: 28:07

And I think from small-cap it's better because it has less volatility, because these companies are a little more established with financing, they're a little more established with timeframes. I mean, they've been making money for years. Those types of names in the mid-cap space, I believe, are a sweet spot because they have control over their finances. They have been around long enough and they have been in the markets so that they realize how to be a public company. So I like the idea of going into these and trying to find the right names. It's just, in my mind, a question of how much do we allocate to it? And that's ultimately what we say is a good name is great, but then you go say, well, where does it go in my portfolio? How do I mix this in?

Clem Miller: 29:03

Right. So, Steve, I would not put more than about 20 percent of my portfolio in these names that we discussed.

Steve Davenport: 29:13

Yeah, I look at it. I believe that you should have somewhere between 10 and 15 and mid cap as a. You know, if you look at the S&P it is made up of mostly the super large names, but I think the number the last time I checked was 13% of the S&P is mid cap. So I think that if you look at that and say somewhere between 10 and 15 is a guideline for taking some of these names. Well, some of these names might you know, the $8 billion Kindrel probably goes down a bit below where you might want to. You know, put in terms of size, but it's.

Steve Davenport: 29:58

I love the idea of owning some of the mid cap names because in my mind, there is a lot of room for them to continue to grow and if we look at the most efficient way to invest, it's holding names for longer periods of time, correct? So these names you can hold, through they become a $50 billion, $ 100 billion. You can hold these names for much longer and therefore I think you can realize some really great returns from them in this space.

Clem Miller: 30:29

MIKE GREEN, I totally agree with you. When you talk about MAG-7, you're already, for some of them, above $1 trillion. Really, how much further can they grow beyond $1 trillion in terms of share prices?

Steve Davenport: 30:46

I think that's what we're trying to ask people is to think about if you're getting out of one and you still have an interest in that space, because I think the AI space is legitimate. I think the space in healthcare around obesity drugs, I believe, is going to be long lasting. I think that genetic engineering is going to cause healthcare to have a lot of characteristics in terms of growth and future that will make it more interesting. Make it more interesting it's not the old healthcare of you know you're buying some Advil and some, you know, some bandages from J&J. It's a different world now with healthcare and I think it's a different world in terms of all of the areas of AI and quantum computing and some of these things are going to be part of our future.

Steve Davenport: 31:44

The issue is is how do we get exposure to the space such that it is, you know, long-lasting? And I would worry if I was taking my 13% in MidCap and I spread it out over six or seven names. Is that diversified enough? And that's where I would start to say you know your names have some differences, but I would, you know I would look for, and so what? I'm not recommending any ETFs, but I have, for some of our clients used an ETF called FLQM, and they use, very similar to you, certain metrics for determining which names are quality names, which names are good value and which names have good growth prospects, and so they have an algorithm that they follow RAOUL PAL.

Clem Miller: 32:47

Is it actively managed, systematically managed? How does it work?

Steve Davenport: 32:51

JIM GRANT. Yeah, it's systematically managed according to a set of rules. So I look at something like that and for the average investor who wants exposure to the space but doesn't have the ability to get into the nitty gritty, as that's a pretty good alternative. And when you look at it, return wise versus the S&P or versus the Russell 2, which, for most people to understand, the S&P, is considered the benchmark for all of large cap and the Russell 2 is considered the benchmark for small cap and I use MDY as a benchmark for mid cap. And so when you look at it, relative to those 5, 10, 15, 20 years, there's a pretty consistent outperformance on an information ratio, and we've talked about peg ratios and future growth versus current size. And I think that what you're doing with information ratios is you're just dividing by the standard deviation, so you know what is their current names and then how do they look in terms of expected return for the risk you're taking? And since we are in a world where risk matters, and since we are in a world where risk matters, I kind of like the fact that in mid-cap you get a nice reward for going down in the spectrum and taking smaller names, but that you're not really taking a lot more risk on a risk-adjusted basis than large cap and you're getting returns that are a bit better. So that, to me, is kind of the essence of what we're trying to do.

Steve Davenport: 34:50

Would I put all my money in mid-cap? No, I think that there's too many good names that are in the larger space, that have businesses that are almost monopolies, and therefore I think those companies are going to be very hard to unseat. Their moats are very, very wide, and so the moats of these smaller companies are not as wide, but you can see how they're developing, that they have potential if their spaces continue to grow above average. So I like the ideas of you know your first four. The next four I'm a little more skeptical. Is that fair?

Clem Miller: 35:32

That's fair, steve. You said a few things now I just wanted to, since you raised them, I wanted to touch on a little bit. First of all, I just want everybody to know that I'm not like starting with I'm not saying you are, but you did raise the issue I'm not starting with the idea of how much I should have in mid cap or small cap. I'm not thinking about this like an asset allocator. I mean, I do have a background in asset allocation, as some of you know we're listening to this but I'm not thinking about this portfolio in terms of asset allocation. I'm not saying I want this much in large cap, this much in mid, this much in small. Just not doing that. I'm looking at individual stocks. So that's one thing I wanted to mention. The other thing I wanted to mention this might be worth an entire different podcast, steve is what is risk? What is risk?

Steve Davenport: 36:37

We throw the word around, you throw pegs around and you throw information ratios around, Right.

Clem Miller: 36:45

I mean, there's so many ways of looking at risk. You know, one of the ones that you know obviously I settled on is short interest, is a really, in my mind, a really good way of looking at risk. But let's take you know, let's take you know, in my mind there's three main ways of looking at risk. You know, putting aside short interest, which is kind of which I find is a unique characteristic for me, more or less, I think that's more so. I think the main ones are information ratio, as you talked about, sharp ratio and its variation, the Sortino ratio and beta and its derivatives of the trainer ratio, which has beta in the denominator, and I've looked at all three of them.

Clem Miller: 37:50

Now, information ratio is interesting, but I think there's a downside to information ratio, at least for the way I look at portfolios. Information ratio really is measuring against a benchmark, and so if you have a benchmark focused process, like, let's say, you're you know you're working with clients and you're trying to beat a benchmark that is in your client's investment statement, then the information ratio is a good thing to look at because it shows how much you're beating that benchmark relative to the risk around that benchmark, the so-called tracking error. So yeah, but I don't look at that.

Steve Davenport: 38:58

Right, so yeah, but I don't look at that Right, I'm not, I'm not. I mean, yeah, I look a level from what you're talking about with some of those names to those ratios and say risk is, you know, are you at risk of not being able to live or it's going to affect your quality of life if your portfolio goes down? Are you looking at the risk of loss, meaning I think that this portfolio is going to make me poorer in terms of I'm going to lose money. Are you talking about risk relative to? I expect that I could easily buy the S&P for six basis points or three basis points or three basis points, so why would I pay you 50, 60, 100 to manage if I can easily get that return? And so I think that some combination of those are what myself and my partner at Circa look at.

Steve Davenport: 40:11

But the real thing that comes out of the last year or so is that nobody could have owned the MAG-7 at. You know more than I mean two to two and a half percent apiece. We're underweight what each of those names are in their benchmark. So therefore we're going to underperform when those names outperform.

Clem Miller: 40:34

And vice versa. In the first six months of last year, 2024, those names actually the MAG-7, actually underperformed, right, I'm talking about the last year and a half.

Steve Davenport: 40:47

When we look at our performance for the last two years, it's really hard to ignore the fact that being well diversified it just didn't pay off, and that's a fundamental part of being an investor is the belief that diversification matters. And if you look at equally weighted which is what we do across longer time horizons, equally weighted performs as well or better than cap weighted. But investors look at their portfolios in a one or two year horizon and say, gee, we're not performing. And that's the risk is that there come these times when these names have just exploded larger and faster than anybody expected and they make up a larger portion of their cap-weighted benchmarks, and as an equal-weighted manager, it's a difficult time for us.

Steve Davenport: 41:51

So, yes, I am a bit talking about something that's more relevant to me than it is to the average personal investor who's doing things for their own retirement and their own set of needs and desires. I'm just saying that when you look at things like this, you try to investigate well, what else are we doing that we could alter to try to get to a better place? And one of those things in my mind is the presence of, or the amount of, mid cap that you have in your portfolio. I think we've become very biased towards the mega caps and my feeling is, once everybody gets on that side of the boat and everybody agrees, there's nothing better than the top seven names, that's when we start to see the boat tip over. I think that we we start to see the boat tip over. I think that we are going to see the boat tip over this year and that's why we're having this call really, you know what the problem is with the.

Clem Miller: 42:52

well, there's several problems with the mega caps, but one, some of them at least. One problem is that you've got the light shining on them. People talk about them, articles are written about them and fewer articles are written about these smaller companies. You have to dig for information about some of these smaller companies.

Steve Davenport: 43:21

I think we know the Fama French are looking at value and looking at small and looking at things that are what they consider to be better long-term prospects.

Clem Miller: 43:32

I think there's an information premium associated with looking at some of these smaller stocks.

Steve Davenport: 43:37

I also believe, Clem, it's very comfortable for people to say I own all of the Mag7. Yeah, of course I have. So there's a cocktail party factor that says I'm into this AI, I'm well, and you say, OK, how into it are we going to be and how much is it making up of our portfolios? I think that's at the fundamental discussion about going past. I believe that we have to first look at income. Is the portfolio providing the income it needs to to meet your needs? Yes, that's number one. Meet your needs, that's number one. Two is it providing growth that will factor in helping you to overcome inflation as a determinant of your long-term value?

Steve Davenport: 44:35

I think that being in equities will do that. But I think that if you're looking at it and saying success is I have to beat the S&P every single year very hard to do that, and so what I'm trying to do is take a longer perspective and say to people I think that one of the ways we're looking into the future is to not just look at the mega caps but look at some of the mid caps, and I think that, as you think about it for the long term, you know, mid caps have that ability to grow. They usually have good relationships with banks and financing, Small cap not so much. They usually have profitability, Small caps not so much.

Steve Davenport: 45:22

You know, mega caps are not without their flaws, but right now you would say, Clem, that everybody believes these seven names are the Alpha supply chains of semiconductors and other components are highly dependent on some very risky suppliers in Taiwan and China and some other countries.

Clem Miller: 46:00

So that's one issue. You've got with Apple, right. You've got with Google and with Microsoft and their cloud services and with Amazon AWS. These guys are under a lot of scrutiny from the EU and even the US regarding their monopolies in the data area, so they're under a lot of scrutiny there. You've got Tesla, and I just got two words for you on tesla, which is elon musk. Uh, there's a risk. There's a risk right there.

Steve Davenport: 46:38

It's interesting when you say that, because I was just reading this article about. Well, you know that they laid off a whole division of almost 5 000 people because the woman wasn't able. The woman who ran the division wasn't willing to cut her staff because she said they needed those people in order to function in terms of battery development and other things. And so you have Musk whose friendship with Trump is pretty well out there and the fact that their government is probably not going to renew the subsidy for buying electric vehicles, which is going to do what? It's going to make it harder for the profitability of Tesla. And what is Tesla doing?

Steve Davenport: 47:20

He's doing what any businessman does. He says if my revenue is going to be affected by the lack of a subsidy, I'm going to reduce my costs and you can reduce your costs, you can get rid of those people. But there's an effect which is long term. You're going to use the best technology and the best people. If they're not active in this space, does your company still have the same growth prospects? And I would say, if there's less revenue and there's less commitment to some of those areas, there's going to be less results. So, while Musk and Trump walk down the path and talk about how good things are. It's putting pressure on Tesla and, ultimately, I don't think that the electric vehicle without subsidies that growth is going to. You know, slow down, because subsidies matter, the economics matter.

Clem Miller: 48:35

EVs are with respect to the climate, given how much they rely on minerals that have to be extracted and where those minerals Nobody is talking about what do we do with the old batteries?

Steve Davenport: 48:41

Nobody is talking about the impact, Nobody ever acknowledges the fact that they're still carbon-related, still need carbon coming from the local utility to generate the electricity. So therefore they are not non-carbon.

Clem Miller: 48:58

The last mag seven I wanted to mention in a questioning way is meta, and meta, like the others, is subject to potential monopoly and also, within the EU, issues related to content moderation, disinformation and the like. But I would just point out that, you know, meta did a kind of a swerve a couple of years ago with regard to this so-called metaverse, put a lot of money into trying to develop the metaverse and then, once they found out that, you know, it wasn't such a great idea after all, they swerved back to their, to their main business. I could have told you that the metaverse was, you know, kind of nonsense, and I think a lot of people could have told them that it was nonsense. And yet they, they went in that direction and for a while I didn't hold.

Clem Miller: 49:56

During that period of time, I did not hold meta because I was concerned about this. Um, uh, you know this, this swerve into a different reality. Yeah, they're now back and they're doing well, uh, but I I think that, uh, I think that these you know what we've talked about with Tesla, with Meta, with the other Megs, evan, I think indicate that these are not necessarily all the greatest right. They have the benefit of having had a super good run, so that they have high market caps, they have strong profitability, but one has to question their growth prospects.

Steve Davenport: 50:41

Right, I mean so let's get back to the original. If we were to sum it up, what would be your points for people in terms of going beyond the max seven?

Clem Miller: 50:53

Well, I think that it's useful to be able to look at some of the smaller stocks, let's say, under $50 billion market cap and, in some cases, under $10 billion market cap. I don't think you should invest in companies that have very little revenue. I think you should look for companies that have been building revenue, growing revenue, companies that have already entered into profitability and have a lot of cash. I think cash is very important for some of these smaller companies because they're still investing and you don't want them necessarily to have to depend on debt. So I think cash is very important and I think there's a certain thematic element obviously to this Cloud services, cloud services, AI, data centers, some renewable energy and I wouldn't put a lot in any one of these stocks just a little bit, and I would keep them, as I do, as a relatively modest proportion of my portfolio. Again, I said something like 20% of the portfolio.

Steve Davenport: 52:16

I mean I think we're on the same page, just we have a slightly different game plan on that page. I mean I believe that mid-caps as a group represent a good alternative to some of these mega-caps and the MAG-7, because I think that you've got firms that have room to grow. You've got firms that have a takeover premium, because there will probably be some larger firm who doesn't have the growth prospects will look to buy them and acquire that growing stream of earnings and revenue. And I believe that when we look at US-based companies who are not doing a lot internationally, in this time of a stronger dollar, it could be a nice way for you to take money out of these MAG-7 and put it into something that is going to give you, you know, in the long run, a very good stream of both revenue and earnings.

Steve Davenport: 53:16

So I think we're on the same page in terms of finding good companies and looking down the spectrum of size. And I think that for most individuals, you know, the first thing is their asset allocation, which would be I believe, that one of the things we haven't talked about is higher for longer. If interest rates stay higher longer, then that bond allocation, if there is a tip in the boat of the MAG-7 and they fall over. I think having a little bit more in some of your fixed or cash allocation could offer you a good entry point if you haven't already been part of those names. So I think for starting 2025, my advice would be just be careful and be careful out there.

Clem Miller: 54:10

Anything else, scott. Well, I would just say that we're going to have I guess I would call it a companion podcast which focuses not on the spice, on the 20%, but more on the 80%, which is focused more on protection.

Steve Davenport: 54:32

Yep. All right, Thanks everyone. I appreciate listening and please like and share and talk to your friends about Skeptic's Guide to Investing 2025. Thank you.